Carol is obsessed about a new cryptocurrency called Cr4zYCrypto, which we will refer to as CC. Her friend David is obsessed about another one called D15cr33tD0114rz, which we will refer as DD. Both Carol and David have a starting wealth wo = $110,000. Each of the coins is priced at exactly $110,000 right now, so they're considering using all of their wealth to buy one of their preferred coins each. It is impossible to buy a fraction of either CC or DD; it is either buy one unit or nothing. They both expect that, with 50% probability, they will be able to sell their coins for $400,000 in just 6 months. But with 50% probability, the value will go to zero and they lose all their money. Their instantaneous utility is W u(W) = = 100000' where W is final wealth. Some values you may find useful: √1 = 1, √1.1 ≈ 1.05, √√2 ≈ 1.4, √√4 = 2
Carol is obsessed about a new cryptocurrency called Cr4zYCrypto, which we will refer to as CC. Her friend David is obsessed about another one called D15cr33tD0114rz, which we will refer as DD. Both Carol and David have a starting wealth wo = $110,000. Each of the coins is priced at exactly $110,000 right now, so they're considering using all of their wealth to buy one of their preferred coins each. It is impossible to buy a fraction of either CC or DD; it is either buy one unit or nothing. They both expect that, with 50% probability, they will be able to sell their coins for $400,000 in just 6 months. But with 50% probability, the value will go to zero and they lose all their money. Their instantaneous utility is W u(W) = = 100000' where W is final wealth. Some values you may find useful: √1 = 1, √1.1 ≈ 1.05, √√2 ≈ 1.4, √√4 = 2
Chapter19: Money Creation
Section: Chapter Questions
Problem 7SQ
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Question
**Practice**
For each of the individuals, what is the expected utility of buying their preferred coin?
A. 4
B. 2
C. √2
D. √1.1
E. 1
Transcribed Image Text:Carol is obsessed about a new cryptocurrency called Cr4zYCrypto, which we will refer to as
CC. Her friend David is obsessed about another one called D15cr33tD0114rz, which we will refer
as DD. Both Carol and David have a starting wealth wo = $110,000. Each of the coins is priced
at exactly $110,000 right now, so they're considering using all of their wealth to buy one of their
preferred coins each. It is impossible to buy a fraction of either CC or DD; it is either buy one
unit or nothing. They both expect that, with 50% probability, they will be able to sell their coins
for $400,000 in just 6 months. But with 50% probability, the value will go to zero and they lose
all their money. Their instantaneous utility is
W
u(W) =
=
100000'
where W is final wealth.
Some values you may find useful: √1 = 1, √1.1 ≈ 1.05, √√2 ≈ 1.4, √√4 = 2
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